ACCT 308 - CORPORATE FINANCE CCA NOTES GAAP VS. TAX (CCA) ‘+ There area numberof cfferent amortization methods avallable under GAAP. These include straightine depreciation, declining balance, double decining balance and sum ofthe years digits. ‘+The ITA generally allows one method of amortization and thats dectning balance (except ins few cases} ‘+ Below is a comparison of accounting and taxation terminology: Taxation Term ‘Accounting Term captal cost Aequbition cast Captal cost lowance *Amentation/Depreition Expense Undeprecated Capita Cost (UCC) Net Book Value ‘Under taxation aws and ules assets are dvded Into a numberof classes (over 40 ctferent lasses ens in Canado) Assets must be added tothe proper asst class to ensure the maximum deduct allowance under tation laws and regulations. 4+ There are no reguations stating that CCA must be deducted from taxable Income. The taxpayer ‘can deduct al none or some CCA to reduce net income for tax purposes t zero, The Income Tax Act (TA) requires thatthe taxpayer show consistency inthe caleulation method, but natin the year to year reporting Additions Assets ae equipment, building, patents, copyrights, vehicles, tc that are purchated bythe taxpayer that wl produce Income from a period of time greater than one year. When the assets purchased the taxpayer must consider the following: + The asset cost includes al costs required to put the asset in a position that fecan produce ‘revenue. These costs include, but are not limited to, the purchase price of the aset freight, installation training, and interest costf the taxpayer elects to include interes inthe capital cost ofthe ase. ‘+ Deducted from the capital cost ofthe asst are any government assistance programs that reduce the capital cost“The taxpayer canclalm CCA when the asset is valable for use. The asset becomes avalable for use at the eatlest of: ©The date when the assets frst used. ‘+ Inthe 2year afer the asset acauisition. + For publi corporations the year depreciation is taken, + Formoter vehicle, atthe time of conse Half Year Rule For most asses, one-half of net adltions must be deducted from the calculation of CCA, Dispositions Unlike GAAP, where dlpositions results In an accounting gain or loss, CAA looks at a number of situations to determine the disposition for tax purposes. These include: ‘+ necapture~ refers toa situation when a CCA class has a negative UCC balance atthe ‘yearend, In these cases the negative balance Is added back to the tapayer's income. Inessence what has happened in a recapture Is too much CCA was deducted n prior {years n excess ofthe assets economic burden, Soto compensate for to much CCA in tare years its added back tthe end ofthe aset'usefullfe Thisrecapture amount Isadded to a company's income. ‘+ Terminal Loss ~ refers toa situation where there ae no assts left Inthe class but a ‘here is a positive UCC balance. This postive balance i than deducted from the taxpayer's Income because there are no assets left nthe clas, but stl CCA to deduct. Ineszence, the taxpayer has not deducted enough CCA to compensate forthe asset's ze, Therelore the remalnder is deducted from income. ‘+ capital Gains Aside rom recaptures or terminal losses, the taxpayer coud stil be subject to capital gains ifthe assets sold. Note recapture and terminal oss does not apply to Class 10.4 (Luxury Cas) ‘Short Fiscal Year Corporation use cal years as thelr accounting calendars. A fiscal ear can start anytime during 2 calendar year. When an organizations newly incorporated or elects to change isl year (you can do this only one) there may bea fiscal year with less than 365 days, ora shot fiscal ear. In this case the CCA must be prorated to the numberof days the sal year. The half year stil applies to adtions uring the short isl year Separate Class Election ‘There area number of stuations where the taxpayer can elect to create a separate cas inthe same _atzet class pool. The most common example ofthis sa separate class election for photocopies, telephone equipment and computer software. In this ase, by creating the separate cass there canbe 2 ‘terminal loss it assets dsposed. These assets are in cass 8 wth a 20% deciningbslance, As 2result there uselu may be shorter than other clas 8 assets. Separating these specii asset from other loss 8 assets allows the company to take terminal loss when the asst dispased. ‘Separate classes are aso required for buildings, rental properties greater $50,000 and automnabiles in ‘Gass 104 {loury vehicles). The reasons for ths separate class designation are With buldings and rental properties I prevents a recapture (busines Income) from being ‘erased by purchasing anew building. + Forautomobiles keeps each vehicle separate, Examples of CCA Calculation ‘+ Typleal yearly CCA caeulations with no adetions,dspostions or changes: January 1, 2009 UCC class 8 50,000 | (CCA Class € at 20% January 2, 2010 UCC Balance ‘CCA aleutation witha $75,000 adtion and the half year ule lsanuay 3, 2009 uecctass 8 | |Add: Addition during the year |Add: one-Half Net Additions January 1, 2010 UCC Balance Note that you remove one-half the action from the CCA base caultion to determine the CCA for the year, Alternatively you could ealeulate the CCA as follows: (125,000 x 20%) + (75,000 x 20% x 12 32,500. The chart above sa better method when there ace several adltions and dispositions. CCA caleulation witha disposition ofan asset. Ifthe ABC Corp. disposes ofa Class Basset with 2 capital cos of $18,009 for total of $3,000. The bascrule for deposition that the deduction‘rom the UCC balance wil be te lesser of te proceeds of upostion or the capital cost of the Individual asset. = Lianuary 2, 2009 UCC Class 8 ‘Add: Additons (Deduction: Dispos the Lessor ofthe Cpat capital costsi8000 | Proceeds § (CCA Base for Clate | Deduct: CCA Class Bat 2056 January 1, 2010 UCC Balance [ACCA class with both anadeition ($37,400) and adspostion (518,300 lessor of Proceeds of Disposal sd Coptal Cost January 1, 2014 UCC Batance 212,000 Net Addons ‘Add: Addtions| 37,400 Less: Dispositions 18,300) 19,100 Deduct: One-half New Adtions (o.ss0) CCA Base 221,580 CoA at 20% (4431) ‘Ad One-Half Net Adlon January 1, 2035 UCC Balance 186,730Recapture occurs when there sa negative balance in the UCC afer the dsposition Is adjusted. Example: I {UCC Opening Balance 00 | sing 26000} NIL) balance ‘Add: Acquisitions During the Year betuc: Ospontos dog he |capitat Cost 29 7 roto | | saen0 Recpature of CCA (to business income! (Opening UCC Balance Te prevent recapture an organization can purchase an asset to remove the negative UCC balance. Terminal Loss occurs when there ae no assets inthe lass and theres @ postive UCC balance TERMINAL LOSS. | ‘Opening Balance | ‘Add: Acoulsitions Duringthe Year | Ni ‘Deduct Dispositions during the year--Lessor of: | Waichihe capita cost 2300) | | | bares roto | (18020) lance with No Remaining Assets 18,000 “Terminal Loss | (13,000) (Opening UCC Balance